Venture funding goes ballistic: VCJ

Venture fundraising soared in the first quarter, led by established VCs raising large, follow-on funds.

Overall, U.S.-based venture firms raised about $9 billion in the first quarter of this year, nearly twice the sum raised in the fourth quarter, according to preliminary data from Thomson Reuters (publisher of VCJ and peHUB).

As usual, large, established venture firms accounted for the vast majority of funds raised. More than 90% of capital went to follow-on funds. And more than three-quarters of capital went to funds with $400 million or more to invest.

Yet smaller and first-time funds also managed to close on capital. Drive Capital, an Ohio-based venture firm launched by two former Sequoia Capital partners, closed on $250 million for an inaugural Midwest-focused venture fund. Amplify Partners, an infrastructure-focused venture investor, closed on $49 million in March for its first-time fund.

The fundraising blitz came during a particularly lucrative period for venture exits. In February, the industry scored its biggest M&A exit ever, by a huge margin, when Facebook agreed to purchase mobile messaging provider WhatsApp for $19 billion in cash and stock. VCs also reaped big returns from Google’s $3.2 billion acquisition of smart thermostat maker Nest.

Yet the mix of upbeat developments for the venture asset class—more IPOs, bigger acquisitions, and higher fundraising totals—also raised worries among some limited partners. The last time that happened on a big scale, during the dot-com boom, things didn’t work out so well.

“Investments are coming back into the asset class, but they are coming at the exact wrong time,” said Alex Bangash, managing director of Rumson Group, a venture and private equity asset manager, speaking at last month’s Venture Alpha East conference in New York.

Bangash said he has been positive on venture capital since 2008 and has seen some spectacular returns from funds raised four to six years ago.

His concern, however, is that wide-open exit windows have a history of lasting only a few years, at most. That means companies raising early and mid-stage funding now likely won’t benefit from today’s buoyant exit environment.